Why Cisco Is a Buy Ahead of Earnings

Jim Cramer has high expectations for this stock and so should you. The company reports Wednesday.

Cisco Systems (CSCO) continues to be the gift that keeps on giving. The shares, which now trade at a 52-week highs, have risen almost 40% from around $22 to $31 since I recommended the stock as a buy on Feb. 9.

On May 17, with CSCO trading at around $26, the charts pointed to higher gains. The result has been a profit of almost 20%. Cisco shares have rewarded investors not only from the company's improved revenue and earnings, its profit metrics continue to strengthen, suggesting Cisco is gaining pricing power as it gains market share.

The San Jose, Calif.-based networking specialist will report fiscal 2016 fourth-quarter earnings after the closing bell Wednesday. The stock is a holding in Jim Cramer's Action Alerts PLUS portfolio.

In a recent note, Cramer and co-manager Jack Mohr said that when it comes to Cisco earnings they "will be looking for an update on the company's ongoing shift toward a subscription-type model, focusing on deferred revenue, fueling growth in its Cloud, Collaboration and Security businesses. We recognize that the Switching & Routing business continues to face competitive headwinds, so we will be listening for management's commentary on the direction moving forward. We also will be eagerly awaiting management's thoughts on recent and future M&A."

In the third quarter, not only did Cisco's gross margin of 65.2% beat the company's own guidance, it climbed 100 basis points from the first quarter and 60 basis points year over year. Why is that important? Beyond helping Cisco extent its streak of earnings beats to 13 quarters, the strong margins will help drive Cisco cash, which now stands at $63.5 billion. That cash will allow Cisco to buy back millions of its own shares and pay future dividends.